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Nothing Non-Gold Can Stay

December 23, 2014 10:19 amDecember 23, 2014 10:19 am

David Beckworth has a good post pointing out that the Fed has been signaling all along that the big expansion in the
monetary base is a temporary measure, to be withdrawn when the economy improves. And he argues that this vitiates the effectiveness of quantitative easing, citing many others with the same view. My only small peeve
is that you might not realize from his list that I made this point sixteen years ago, which I think lets me claim dibs. Yes, I’m turning into
one of those crotchety old economists who says in response to anything, “It’s trivial, it’s wrong, and I said it decades ago.”

Beckworth offers as an example of how it should be FDR’s exit from the gold standard, which was expected to — and actually did — signal a permanent increase in the monetary base. Indeed, if you
want to get monetary traction at the zero lower bound, that’s how to do it.

The point, however, is that this says that effective monetary policy in a liquidity trap requires both an actual and a perceived regime change, and that’s very hard to engineer. Japan may be pulling it off now,
but only after 15 years of deflation — and even so the achievement is very fragile, vulnerable to fiscal tightening. Was there ever a realistic possibility of getting that in America, this time around?

I wrote about this back in 2011, explaining why I devoted my efforts in 2009 to pushing for fiscal stimulus. It seemed obvious
to me that the Fed viewed the crisis as temporary, and was just not going to be willing (or even able) to commit to a permanent change in policy, especially with all the sniping it faced from the right. And that’s
still true now, even after six years at the zero lower bound.

This is why I get annoyed with statements along the lines of “the Fed has pursued a tight-money policy”. We can argue about definitions, but that doesn’t get very well at the reality, which is “The
Fed hasn’t been willing to commit to a permanent regime change in the face of what it considers a temporary problem.” And even if it had been willing to make that commitment, would people have believed
it, enough to get the desired results?

The point is that going off the gold standard isn’t something you get to do very often. And anything non-gold — anything that isn’t the moral equivalent of that departure — is likely to be,
and be seen as, ephemeral.